Mandatory audit firm rotation: a critical composition of practitioner views from an emerging economy

Abstract

Purpose This study aims to address an acknowledged gap in the literature for the analysis of experienced practitioner views on the effects and implications of mandatory audit firm rotation (MAFR). Design/methodology/approach Using an exploratory and sequential design, data was collected from South African regulatory policy documents, organisational comment letters and semi-structured interviews of practitioners. These findings informed a field survey, administered to auditors, investors, chief financial officers (CFOs) and audit committee members of Johannesburg Stock Exchange (JSE) listed companies. Findings Practitioners expressed considerable pushback against the potential efficacy of MAFR to improve audit quality due to various “switching costs”, notably the loss of client-specific knowledge and expertise upon rotation. In addition, the cost and disruption to both the client and audit firm are considered significant and unnecessary, compared to audit partner rotation. The audit industry may suffer reduced profitability and increased strain on partners, leading to a decline in the appeal of the profession as a career of choice. This is likely to have negative implications for audit industry diversity objectives. Furthermore, the industry may become more supplier-concentrated amongst the Big 4 firms. Practical implications The findings have policy implications for regulators deciding whether to adopt the regulation, as well as guiding the design of policies and procedures to mitigate the negative effects of adoption. Originality/value The participants are experienced with diverse roles concerning the use, preparation and audit of financial statements of large exchange-listed multinational companies, as well as engagement in the auditor appointment process. The extant literature presents mixed results on the link between MAFR and audit quality, with most studies relying on archival and experimental designs. These have a limited ability to identify and critique the potential’s witching costs and unintended consequences of the regulation. Experienced participants responsible for decision-making within the audit, audit oversight and auditor appointment process, are best suited to provide perspective on these effects, contrasted against the audit regulator’s position.

Audit quality implications of regulatory change in South Africa

“…This is also reflected in the contradicting views on MAFR by regulators, some of whom adopted the rules (e.g. the EU and South Africa) and others, such as the US, Canada and Australia, who have repeatedly decided against MAFR in favour of more traditional audit partner rotation rules which they believe offer a superior overall cost-benefit trade-off (Harber and Maroun, 2020;Horton et al, 2018;Roush et al, 2011). Singapore, having adopted MAFR over its banking industry, recently decided to repeal the regulation, citing inconclusive research findings and potential negative consequences relative to partner rotation rules (Choudhury, 2017).…”

“…South Africa has a highly advanced audit industry, capital market and systems of corporate governance [1]. Also, South Africa is most recent of a very limited number of jurisdictions to move beyond partner rotation rules and implement MAFR (Harber and Maroun, 2020;Lennox, 2014). Researchers are only beginning to investigate MAFR effects in the EU since its implementation in 2016 (see Horton et al, 2021).…”

Mandatory audit firm rotation: A student perspective An assessment of the perceived impact on auditor independence

“…This makes the need for auditor independence (both in mind and appearance) to be foundational to Auditing (Harber 2016;Tanlu et al 2003;Quick 2012;Hussey 1999;Dezoort & Taylor 2015). In a more recent study on MAFR, the practitioners have also alluded to the importance of independence as a critical aspect to MAFR (Harber & Maroun, 2020).…”

Joint Provision of Non-audit Services to Audit Clients: Empirical Evidences from India

“…The extant researches reveal that beginning with the pivotal work by Simunic (1984), the studies on the issue of NAS and auditor independence include (a) reviews (Francis, 2006;Francis et al, 2004;Hay, 2017;Tepalagul & Lin, 2015), including meta-analysis (Habib, 2012); (b) archival research (Abdul et al, 2020;Ashbaugh et al, 2003;Beardsley et al, 2021;Ezzamel et al, 1996;Frankel et al, 2002;Lim & Tan, 2008;Whisenant et al, 2003) including capital market reaction studies (Chaney & Philipich, 2002); (c) experimental studies (Aschauer & Quick, 2018;Causholli et al, 2014;Friedman & Mahieux, 2021;Meuwissen & Quick, 2019;Tang et al, 2017); and (d) survey research (Akinbowale & Babatunde, 2017;Harber & Maroun, 2020;Onulaka et al, 2019;Quick & Warming-Rasmussen, 2005 ). The majority of the studies are archival and experimental, limiting the ability to critique the existing regulations (Harber & Maroun, 2020). To find a sustainable solution, engagement with key stakeholders is vital.…”

“…This study is an attempt to fill the gap in empirical research by presenting the practitioners' perspectives. Further, most of the studies are concentrated in the US (Ashbaugh et al, 2003;Davis et al, 1993;Mishra et al, 2005;Whisenant et al, 2003), UK (Ezzamel et al, 1996;Ferguson et al, 2004), Australia (Butterworth & Houghton, 1995;Craswell, 1999;Lee et al, 2009), Malaysia (Abdul et al, 2020;Ahmad et al, 2006;, Nigeria (Onulaka et al, 2019), South Africa (Harber & Maroun, 2020), China (Tang et al, 2017) and some of the EU Nations (Aschauer & Quick, 2018;Meuwissen & Quick, 2019;Quick et al, 2013;Quick & Warming-Rasmussen, 2005), etc. Very few studies have been carried out to present the Indian perspective.…”